Projected Retirement Income

If we retired today, how much would our retirement income be? To answer the question, I updated an analysis I did a few years ago and came up with this graph:

Passive income is what our combined tax returns would be in each year if we had not received a salary nor made any work related deductions. I also added back charitable deductions and personal concessional superannuation contributions to our SMSF as these aren't costs in the same way that margin interest is, for example. So, it is not 100% passive as it includes realised capital gains and losses. I also plot how much a 4% withdrawal from our superannuation accounts and US retirement fund would amount to under the assumption that we apply the 4% rule to these accounts. My thinking is that unrealised gains on the non-retirement funds would be sufficient to maintain purchasing power. Taxes are likely to be very low, so I just ignore them.

Last tax year our income would have been AUD 154k. Our spending not including mortgage interest and life insurance was AUD 152k. So, this is one reason why I don't feel comfortable retiring as we are spending very close to our sustainable income and spending is likely to continue to rise. On the other hand, if we apply the 4% rule to our entire portfolio at 30 June 2022, it would yield AUD 175k. But maybe the 4% rule is not conservative enough. My recent analysis of how much of our returns is needed to compensate for inflation, was much more pessimistic than this.

If we were forced to stop working we could easily slash spending by taking the children out of private school, which accounts for an expected 30% of our budget.

How Much Investment Income Do We Need to Compensate for Inflation?

 

This chart compares the fitted investment income curve from my previous post about the "boiling point" with the monthly loss of value of our portfolio (including our house) due to inflation. I just took the monthly percentage change in Australia's consumer price index and multiplied by the value of our portfolio that month. The gap between the blue and orange curves is a naive estimate of how much can be spent each month in retirement mode.

Currently, projected investment income is only just enough to cover the loss from inflation. Smoothing inflation over twelve months tells a similar story:

Here I divide the CPI by its value twelve months earlier, take the twelfth root and subtract one before multiplying by the value of the portfolio. This shows that inflation is coming down a little but is still high. We really need to boost our rate of return relative to inflation in order to retire and maintain the real value of the portfolio. It is hard to think about retiring until in inflation is more under control.

Investment income accounts for superannuation taxes, but assumes that the only tax on investments outside superannuation is exactly equal to the franking credits paid.* In retirement, the superannuation tax would go away, but there would be capital gains and other taxes on investments outside superannuation. So, probably it is in the ballpark.

* This is because the series is computed as the change in net worth minus saving and inheritances. Saving is computed after tax including superannuation contribution taxes and income tax.

Further Update on Big Moomin's Account

I recently posted about the returns on the children's portfolios. It looks like it would be complicated to transfer Big Moomin's portfolio to me here in Australia. My brother has taken up my idea of just picking a couple of diversified funds and sticking with them and sent me details of two. These are growth oriented funds that invest in shares in his country and internationally as well as some bonds. The managers have mandates to do whatever they want. There isn't really a stated strategy. These are called "flexible" funds there. One is a few years old and has done well and isn't too correlated with any particular stock index. The other is only just over a year old and also did well in 2023. So, I said, sure, invest in those two funds and see how it goes after a year.

When Was the Boiling Point?

Interesting post from Enough Wealth on the "boiling point" when more of your gain in net worth comes from investment returns rather than saving. Rather than just look at the change in net worth, I created the following graph of monthly total saving from non-investment income:

This includes superannuation contributions and mortgage principal payments but not inheritances. I fitted a linear trend to this. Then I created a graph of investment income (including superannuation returns and changes in the value of our house):

 

I fitted a quadratic trend to this data. When the two curves cross we are at the boiling point. Because of the volatility of investment income it's a bit hard to see where that is. So, I also did this close up:

 

The boiling point was in January 2012 according to this analysis. Currently the trend is at about $35k per month, which is about four to five times the savings trend. That doesn't really say anything about the ability to retire. Some of the investment return is needed to maintain the real after inflation value of the portfolio and it needs to be compared to spending not saving!

Bottom in Real Estate?

Fundrise have come out and said that they think the bottom is in in the commercial real estate market. Coincides with my assessment that maybe the bottom is close for a diversified portfolio. This graph shows monthly percentage returns of the TIAA Real Estate Fund and a twelve-month moving average:

So, I am switching some of my US 403b account back to the TIAA Real Estate Fund. My mistake in the last couple of years was not switching enough out of this fund to CREF Social Choice, though I did switch a lot. I was at 43% Real Estate, 57% Social Choice last month and now am at 70% Real Estate, 30% Social Choice. As a result of the switches I managed to roughly maintain the balance of the account in the last couple of years:

I was actively saving in this account up to June 2007, after which the trend is solely due to investment returns.

Contributions to Annual Return

I haven't formally finalized the accounts for 2023 yet. I will need to wait to get investment returns on illiquid investments that report with a long time lag. But I do have a preliminary estimate of 6.38% in AUD terms (6.64% in USD terms). This is rather disappointing as the MSCI returned 22.81%, the S&P 500 26.27%, and the ASX 200 14.45%. Our target portfolio returned 10.84%. So, why did we underperform the target by so much? The following tables analyze the returns of each portfolio:

RoR is the rate of return of the asset class and contribution is the rate of return multiplied by the share of the portfolio. The sum of contributions gives the portfolio return. The returns for the Moom portfolio are in currency neutral and unlevered terms and, so, differ slightly from the Australian Dollar return for the portfolio. The asset classes don't quite match, but it's close enough. 

The target portfolio got 2.48% returns from international stocks. The return I got from US stocks at 15.8% was less than the MSCI index at 22.5% but more importantly, my allocation to other countries resulted in a negative return and so the total contribution from international stocks was only 0.89%. 

The target portfolio got 1.73% returns from Australian stocks. Again, my return from Australian large caps was a bit lower than that of the ASX 200 but my allocation to small cap stocks had a negative return and so the overall contribution was only 0.49%.

The target portfolio represents managed futures using the Winton Global Alpha Fund. This gave a contribution of 0.59%. I also allocated to the Aspect Diversified Futures Fund and Australian Dollar futures. These dragged down returns resulting in a contribution of only 0.18%.

The target portfolio obtained a 1.61% contribution from hedge funds (based on the HFRI index), while I only got 0.25%. Though some funds like Pershing Square did very well, other Australian hedge funds under-performed.

Real Assets is the area where I outperformed. I represent this in the target portfolio using the TIAA Real Estate Fund. My allocations to other real assets resulted here in a small gain rather than a large loss.

Bonds and gold made a similar contribution to each portfolio. Finally, venture capital made an outsized contribution to the target portfolio of 4.38%. My venture capital investments lost money overall in 2023. I did much better than the target portfolio in buyout investments like 3i. But this wasn't sufficient to match the target portfolio's overall private equity contribution.

I think there is some luck here. In a different year, non-US stocks or Australian small caps might perform well. On the other hand, I also need to eventually reduce some of my allocations to Australian hedge funds that have under-delivered.

Update on the Children's Portfolios

I was calling our children Moomin and Baby Moomin on this blog. But the latter is no longer a baby, so let's call them Big and Little Moomin :) My brother reported to me that Big Moomin's portfolio only returned 4% in USD terms in 2023. He put that down to not trading enough because the bank has made it harder to trade on this trust account...  Obviously it's down to being in the wrong things. I have tried to get him to stick with a diversified portfolio. He manages this one and the accounts for two of his children who all inherited money from our mother. The will stated that they couldn't access the money till they were 23 years old. I manage Little Moomin's portfolio, because he was born after my mother died and so wasn't included in the will. My brother and I each contributed from our inheritances to his account. I invested his money in an investment bond with Generation Life. His account returned an estimated pre-tax 14% in AUD terms in 2023.* The target portfolio benchmark made about 10.8% for the year. So, finally, this portfolio outperformed the benchmark after under-performing so far:

The graph also shows how the target portfolio has matched the ASX 200 while experiencing lower volatility over this period.

Anyway, my brother says that he is going to try to transfer the money to me. Initially, he was advised that the money had to stay in his country, where my mother lived, but now apparently he has reason to think otherwise.

* It is estimated, as 30% tax is deducted inside the investment bond. You can reduce this tax eventually if the child "breaks the bond" by adding an additional investment and they are in a lower tax bracket when withdrawing the money.

Scammed

I just got scammed for AUD 2,300. I got an email from my webhosting company saying that my card had expired and I needed to renew. Except it wasn't actually from them. Instead of an AUD 100 or so fee, somebody called HalalBooking London charged me AUD 2,381. Now looking at the original email, I see it came from info@thelabhaus.com rather than Crazy Domains. I contacted Commonwealth Bank and they will try to recover the money and I cancelled my debit card. The email looked perfect apart from the email address. I had thought that if a payment was still pending they could always cancel it. Apparently not true. Instead, the bank won't do anything until the payment is no longer pending and only then will they try to reverse it!

Based on this, it seems that there is very little protection against getting scammed here in Australia compared to in the US.

HalalBooking London actually is a website where supposedly you can book Muslim friendly hotels in London. I am guessing it is actually someone else using that name for added confusion value. I contacted the website and asked them to reverse the charge if it is them or be aware that scammers are using their name. I also informed Crazy Domains about the scam.

In other news, Moominmama's friend who bought a knockdown and rebuild property in one of the most expensive suburbs of our city is now asking whether we have a spare AUD 170k we can lend them. Because of the increase in interest rates their bank has reduced the amount they are willing to lend against their existing house. I can't give specific advice without a lot more detail, but seems to me that they are likely going to have to sell their existing house ASAP if they don't want to end up reselling the property they bought. My guess is that the RBA is still going to raise rates more at this point.

P.S.

According to ChatGPT, if I cancelled my debit card while the transaction was still pending the scammer won't be able to complete processing the transaction. This makes sense, but I am a bit dubious as Commonwealth Bank asked me if I wanted to cancel the card to prevent them getting more money rather than to stop them getting this amount. CrazyDomains said I should report it to the police. I already have reported it to ACCC.

P.P.S. 15 November

I got a response from HalalBooking. They said that someone did make a booking via their site for this amount and they detected it as a fraud and refunded it. They said that there is a security vulnerability in the bank's software that was exploited. So, this is looking like there will be a positive outcome.

P.P.P.S. 17 November

Good news - the money has been refunded to our account. I don't know whether this would have happened anyway or it is because I cancelled my card quickly or because I contacted HalalBooking.

P.P.P.P.S 4 December

I found, when compiling the monthly accounts for November, that did have to pay an AUD 70 fee for the international transaction!

Reducing Gas and Electricity Bills

Today I received new format gas and electricity bills from ACTEWAGL which include a notice on the front page that we can reduce our bills by a total of AUD 558 per year by switching to the Direct Saver Plan. I am now doing that. This seems to just be straight up price discrimination, like the higher mortgage rates I used to pay.

Second Australian Unity Merger Plan Scuttled

Australian Unity and Cromwell announce that their fund merger plan is cancelled. I wasn't very enthusiastic about the merger and so am happy it has been called off. Cromwell's fund only included offices, so while the deal was diversifying for Cromwell unitholders it was not so for Australian Unity unitholders. I invested in the fund to get diversified property exposure, not just offices.

Moominmama's Taxes 2022-23

I also did Moominmama's taxes for this financial year. The post about last year's taxes is here. Here is a summary of her tax return for this year:

Her salary was up only 3% this year. Gross income was down 2%, though there were some big fluctuations across categories. Australian dividends rose quite strongly, which is something of a trend...

Total deductions rose by 46%, mainly because of increased interest costs. As a result, net income fell 27%. 

Gross tax applies the tax bracket rates to taxable income. This was more than offset by franking credits. So, she gets the franking credits refunded as cash and has a negative tax rate. As a result, she should get a large refund.

Moominpapa's 2022-23 Taxes

This year, I've prepared our tax returns just before the deadline. Here is a summary of my taxes. Last year's taxes are here. To make things clearer, I reclassify a few items compared to the actual tax form. Of course, everything is in Australian Dollars. 

Overall, gross income and deductions barely changed from last year, falling by 1% each.

On the income side, Australian dividends and franked distributions from managed funds are again up strongly. My salary still dominates my income sources but again only increased by 3%. 

Other income sources are down strongly, partly because I shifted the assets, which produced these returns into the SMSF. Net capital gain is zero due mainly to some strategic sales to generate losses. I am carrying forward $93k in capital losses.

Deductions fell 47% because last year they included the loss on Virgin Australia bonds. I redistributed deductions a bit to match the size of different holdings. This resulted in some big changes in the individual categories. Didn't plan on charity falling that much...

Gross tax is computed by applying the rates in the tax table to the net income. In Australia, you don't enter the tax due in your tax return, but I like to compute it so that I know how big or small my refund will be.

Franking credits (from Australian dividends), foreign tax paid, and the Early Stage Venture Capital (ESVCLP) offset are all deducted from gross tax to arrive at the tax assessment. 

Estimated assessed tax fell because of the larger offsets this year.

I estimate that I will pay 25% of net income in tax. Tax was withheld on my salary at an average rate of 32%. I already paid $7,782 in tax installments and so estimate that I should get a refund of $8,701.

Good News from Pershing Square

The SEC finally approved the registration of Pershing Square SPARC Holdings. I bought Pershing Square Tontine Holdings (PSTH) around $23. We got $20 back when the SPAC was wound up. It's great to see that it will now be resurrected. Hopefully some good deal will come out of this. I wasn't that inspired by the Universal Music deal, which fell through, anyway. We ended up being invested in that all the same through PSH.L.

Why I Haven't Posted a Monthly Report Recently

I haven't posted monthly reports for July or August. The reason is that the July accounts have an error of more than AUD 12k and I don't have the time or inclination to try to reconcile them at the moment. Probably this will have to wait till later in the year when my teaching is over. I focus all my teaching in the second semester so I am really busy. And I am also working on my new hobby of genealogy research, since December last year. Probably I will eventually make a post for the second half of the year as a whole with monthly investment performance figures. There is also an error of more than AUD 8k that cropped up now in the December 2022 accounts, which wasn't there before. Possibly they are related...

Anyway,  in AUD terms July is currently at 2.18% (compared to our target portfolio of 1.77%. ASX200 = 2.89%) or 3.18% in USD terms (HFRI = 1.75%, MSCI = 3.45%). So not bad.

August is at 0.05% (ASX = -0.44%, target = 0.90%). In USD terms though it was a fall of 3.62%. Stock markets were down but not that bad...

P.S.

After writing this post I realised what might be wrong with December 2022 and fixed that and June 2023. But July 2023 still has a 12,000 dollar error...

Nischa: Great Personal Finance Videos

I just found these great personal finance videos. I know most of this stuff, but lots (most?) of people could learn a lot from this!

Paypal

Closed my Paypal account. Only time it ever comes up is when someone is trying to scam me. Just had someone try to charge USD 599 to me.

Lifetime Health Cover Loading

In Australia, if you don't get private health care when you are younger, if you finally do get it you have to pay an extra "loading". I had to pay 36% more and Moominmama 14%. But apparently that is only for ten years. The ten years is up and our premium has been reduced!

June 2023 Report

We finally have all the investment statements and reports for the 2022-23 financial year, which means I can put together a report on our investment performance in June. In June, The MSCI World Index (USD gross) rose 5.85%, the S&P 500 rose 6.61%, and the HFRI hedge fund index gained 2.20% in USD terms. The ASX 200 rose 1.74% and the target portfolio 1.09% in AUD terms. All these are total returns including dividends. The Australian Dollar rose from USD 0.6479 to USD 0.6657. We lost 0.27% in Australian Dollar terms or gained 2.40% in US Dollar terms. So, we under-performed all benchmarks apart from the HFRI. Our hedge fund and private equity investments underperformed their benchmarks, dragging down performance relative to the target benchmark, which has a 38% weighting on these two asset classes.

Here is a report on the performance of investments by asset class:

The asset class returns are in currency neutral returns as the rate of return on gross assets. I then add in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return. Gold was the biggest detractor, while futures contributed the most.

Things that worked well this month:

• Pershing Square Holdings and Australian Dollar Futures did well.
  

What really didn't work: 

• Gold and Tribeca Global Resources did badly.
  

The investment performance statistics for the last five years are not looking good and I don't feel like reporting them. 😕

We are now very close to our target allocation. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. It was another quiet month. The only additional investment moves I made were:

• I bought 500 PMGOLD.AX and 1778 CDO.AX (Cadence Opportunities Fund) shares.
  

Superannuation Returns in the Long-Run

Following up from my post on how our SMSF is performing compared to our managed superannuation funds, here is how our superannuation in general has done over time:

Note that the y-axis is a log scale! Our superannuation has outperformed the MSCI index in AUD terms in the long-run. The big win was in the couple of years after 2002 when I rolled over my Unisuper fund to Colonial First State and invested in geared funds. Then I got too conservative leading up to the GFC - the flat top you can see on the red line. Superannuation returns crashed in the GFC because I got aggressive again too early. After that, we have followed the market more closely until after 2018 when we have gone into a bit more of a capital preservation mode again. This reduced the volatility in 2022 but returns in 2023 are a bit disappointing so far.

On the other hand, our non-superannuation assets had catastrophic performance up to 2009. After that, I got my act together, which eventually gave me the confidence to set up an SMSF. But you can see the value of handing control to an external manager early on.

Superannuation returns are pre-tax but after fees. My method of imputing tax paid for public superannuation funds probably exaggerates their performance a bit. These time based returns are quite different from dollar based returns. All the early volatility wasn't that important because total assets were small. Performing well now is much more important.

Enough Wealth followed up on my original post by comparing his SMSF over a longer period to a basket of industry funds.

Superannuation Performance Update July 2023

Inspired by this article in the AFR, here is an update on how well our SMSF is doing compared to Unisuper and PSS(AP). after underperforming for a few months, it outperformed in June and July:

Looking at the longer term, it is still ahead of the two super funds:

It rode out the 2022 downturn with less "volatility". PSS(AP) actually has a slightly lower standard deviation of monthly returns but also a lower mean. As a result, the SMSF has an information ratio (Sharpe ratio with a zero return hurdle) of 1.1, while Unisuper is at 0.61 and PSS(AP) at 0.73. Relative to Unisuper, the SMSF has an annual alpha of 5.36% and a beta of 0.44 (Relative to PSS(AP): 4.61% and 0.61).

I compute all these returns pre-tax. This probably overestimates the taxes paid by Unisuper and PSS(AP), giving them a bit of an advantage. OTOH, I don't charge for my time in managing the investments.

Got a Call from Australian Unity

I blogged recently about the proposed merger between the Australian Unity Diversified Property Fund and a Cromwell office fund. Today, I was called by a representative who told me about the plan and timeline and asked if I had questions and whether I would support the proposal So, I told him that I understood the reasons for seeking a merger and that I thought this merger was better than previous proposal but also that I invested in the fund to get exposure to a diversified portfolio and now it was going to be a office dominated fund, a sector that's not doing too well. So, I wasn't really sure which way to vote. He sounded disappointed and said he understood my thinking...

New Australian Unity Merger Proposal

Australian Unity Diversified Property Fun has a new merger proposal on the table following the failed merger in 2021-22. This is a merger with the unlisted Cromwell Direct Property Fund. This seems like a fair deal unlike the previous one. It has various advantages. The only downside is that the merged fund will have 70% of its assets in offices. The attraction of AUDPF was that it was truly diversified and not dominated by offices. 

I expect I will stay in the fund (there is only a limited near term opportunity to withdraw) and think about withdrawing in 2025 when a full liquidity event is promised. The main risk is that office properties are downvalued in 2024 and 2025 after the merger happens. I am seeing a decline in value in the TIAA Real Estate Fund even though only a quarter of their assets are in offices. I reduced my holdings near peak value, should have reduced them more. So, maybe I should try to withdraw some of our investment when allowed later this year...